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  • Richard Fonagy

Death of a Taxpayer: How To File The "Final Return"




For those filing a Final (Deceased Return) this will explain what you need to know:


For Those Interested (10 minute read)


Amounts you can claim in full on each return


ON EACH OPTIONAL RETURN AND ON THE FINAL RETURN, YOU CAN CLAIM:

  • the basic personal amount (Line 30000)

  • the age amount (Line 30100)

  • the spouse or common-law partner amount (Line 30300)

  • the amount for an eligible dependant (Line 30400)

  • the Canada caregiver amount for spouse or common law partner, or eligible dependant age 18 or older (Line 30425)

  • the Canada caregiver amount for other infirm dependants age 18 or older (Line 30450)

  • the Canada caregiver amount for infirm children under 18 years of age (Line 30500)

This will allow the credits to be magnified.


Amounts you can split between returns:


THERE ARE CERTAIN AMOUNTS YOU CANNOT CLAIM IN FULL ON THE FINAL RETURN AND OPTIONAL RETURNS. HOWEVER, YOU CAN SPLIT THESE AMOUNTS BETWEEN THE RETURNS.

When you split an amount, the total of the claims cannot be more than what would have been allowed if you were only filing the final return. Amounts you can split are:

  • adoption expenses (Line 31300)

  • disability amount for the deceased (Line 31600)

  • disability amount transferred from a dependant (Line 31800)

  • interest paid on certain student loans (Line 31900)

  • tuition, education and textbook amounts for the deceased (Line 32300)

  • tuition amount transferred from a child (Line 32400)

  • charitable donations that are not more than the net income you report on that return (Line 34900)

  • cultural, ecological, and Crown gifts (line 34200 of Schedule 9, Donations and Gifts)

  • home buyers' amount (Line 31270)

  • home accessibility expenses (line 31285)

  • medical expenses (Line 33099), which you can split any way you want between the final return and any optional returns



MINIMIZE TAXES OF A DECEASED TAXPAYER

There is no "estate tax" in Canada, but when a person dies there is a deemed disposal of any capital property, so any capital gains would be taxed at this time.


This would include assets such as principal residences, vacation properties and investments.

Any capital gain on the principal residence might be eliminated by the principal residence exemption.


The resulting capital gains net of capital losses would be recorded on the final return for the year of death. Special tax rules apply for capital losses in excess of capital gains for the year of death.


If the deceased taxpayer's property is being distributed to the taxpayer's spouse or to a "spouse trust", then under certain circumstances taxable capital gains, allowable capital losses, recaptures of capital cost allowance, and terminal losses may be deferred.


The deceased taxpayer's cost basis for the property would then become the cost basis for the property to the spouse. Thus, any taxable capital gains would be deferred until the property is disposed of by the spouse.


Alternatively, by doing an election, the deemed proceeds to the taxpayer can be the fair market value of the property - in some situations, this can be more beneficial. See the links at the bottom to the T4011 guide for detailed information.


A deceased taxpayer may contribute to the spousal RRSP of the surviving spouse or common-law partner, depending of course on the age of the spouse and the unused contribution room of the deceased.


More than one tax return may be filed for a deceased taxpayer, allowing the taxpayer's income from the year of death to be split among different returns. One "ordinary" return would be filed for January 1st to the date of death. This is called the final return.


There are 3 optional tax returns that can be filed as if the taxpayer is "another person".

These returns can reduce or eliminate income tax in the year of death, because certain deductions are allowed to be claimed on the ordinary return as well as the optional returns.


THESE OPTIONAL RETURNS CAN BE FILED FOR INCOME FROM:


  • "rights or things" return - income items that are earned, but not received at the date of death. These rights or things include such things as:

  • dividends declared but not received

  • bond coupons matured but not cashed

  • employment salary, commissions and vacation pay owed by the employer at the date of death, for a pay period that ended before the date of death

  • unpaid employment bonuses

  • CPP and OAS payments received after the date of death

  • work in progress of a professional business, which has previously been excluded from the business revenue (see modified accrual basis accounting)

  • return for a business partner or proprietor - for income from the business from the end of the business fiscal period to the date of death

  • return for a graduated rate estate (GRE) - for income received by the deceased taxpayer from a GRE from the end of the trust fiscal period to the date of death. (A graduated rate estate (GRE) is an estate that arises as the result of the death of a person on or after December 31, 2015, and no more than 36 months after the person's death. The estate at that time must be a testamentary trust.)

  • If you choose not to file this return, all income from the GRE should be reported on the Final Return.


  • return for a business partner or proprietor - for income from the business from the end of the business fiscal period to the date of death


  • return for a graduated rate estate (GRE) - for income received by the deceased taxpayer from a GRE from the end of the trust fiscal period to the date of death.


If you choose not to file this return, all income from the GRE should be reported on the Final Return.


The optional returns are filed using the normal T1 personal tax return forms. These forms can be obtained from the Canada Revenue Agency (CRA) General Income Tax and Benefit Package web page.


THE CANADA PENSION PLAN (CPP) OR QUEBEC PENSION PLAN (QPP) DEATH BENEFIT

is paid to the estate of the deceased, or maybe paid to another person who applies for the benefit, including the person responsible for paying the funeral expenses, the surviving spouse, or next-of-kin of the deceased.


The death benefit can either be included as income on the tax return of the recipient for the year in which it was received, or it can be included on the T3 return for the testamentary trust created either by the will of the deceased or by court order, also on the return for the taxation year in which it is received.



The executor, trustee or administrator

may be required to file a T3 return. When certain income is received by the estate after the date of death, it should be reported on a T3 return for the year in which it is received.


Amounts you can claim only against certain income

There are some amounts you can only claim on those returns on which you report the related income. The amounts are:

  • Canadian Forces personnel and police deduction (Line 24400)

  • security options deductions (stock options and shares) (Line 24900)

  • vow of perpetual poverty deduction (Line 25600)

  • Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) contributions (Line 30800 or Line 31000)

  • employment insurance premiums (Line 31200)

  • Canada employment amount (Line 31260)

  • pension income amount (Line 31400)

  • federal dividend tax credit (Line 40425)

  • social benefits repayment (Line 42200)


Example

A deceased person's total employment income in the year of death was $30,000, and the CPP contribution was $800. Of the $30,000, $1,000 is a right or thing. Of the $800, $27 is the CPP contribution the person paid on the $1,000. You decide to file a return for rights or things.

On the final return, you report income of $29,000 and claim a CPP contribution of $773. On the return for rights or things, you include income of $1,000 and claim a CPP contribution of $27.

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